We review the empirical evidence on microfinance and asset grants to the ultra poor or microentrepreneurs, and assess our ability to account for this evidence using quantitative theory. Properly executed, these interventions can help segments of the population increase their income and consumption, but neither literature gives much reason to believe that such interventions can lead to wide-scale, transformative impacts akin to escaping aggregate poverty traps.

While one-time asset grant programs hold a lot of promise based on the empirical evidence, the model shows that it has negligible longer run effects, since the economy, absent any other permanent change, will revert eventually to its unique invariant distribution.

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First, although microfinancial interventions can have substantial steady state and transitional impacts on development measures (income, consumption, productivity, etc.), no escape from aggregate poverty traps operating through wealth distributions and general equilibrium effects occurs in the simulations, since these traps do not exist. In this sense, we are unable to “make a miracle”. Second, the simulations show that one- time redistribution in the form of asset grants alone tends to have only short run aggregate and distributional impacts, as eventually infused assets are depleted over time. In contrast, microfinance—at least subsidized low interest microfinance—has potentially longer run impacts because of its permanent availability and general equilibrium impact through wages. The cost effectiveness of smaller but sustained subsidies to microfinance vs. one-time as- set grants is therefore of interest. It also suggests the importance of proper targeting and technical training for asset grant programs to have persistent effects.